Archives For accountancy

With pressure on public finances being at an all-time high on most countries – and public trust in both business and governmental institutions seemingly being at the other end of the scale – the role of finance professionals will come under increasing scrutiny.

Accountants have a critical role to play in rebuilding waning public trust by championing the cause of developing anti-corruption procedures and cultures. To do this, they will have to work with other stakeholders to help eradicate fraud and corruption, through a combination of education, fraud-awareness programmes and training in forensic accounting.

This is no easy task, but it can be done. In the UK, the newspapers are currently full of stories of scandals in the healthcare, social care and police sectors – all of which came to light through whistleblowing by public sector staff. The fear of retribution and repercussions are always there. But it is even more vital than ever, at a time of unprecedented constraints on public spending, that finance professionals feel able to highlight issues where public money raised through taxation is misspent or misused – and that those responsible can be held to account.

ACCA also calls for proper separation between the accounting and auditing functions within all governments. In some countries that does not exist, which impairs accountability and transparency. The report accepts there is a challenge in educating the populace about the audit process – and in making it more transparent – to ensure public confidence.

Yet it could be argued that the public sector is, in many ways, ahead of the private sector in this respect. The ongoing regulatory and political inquiries into the role of audit – highlighted in this space last month – reflect a wider public sense of dissatisfaction with the auditors of banks and other major institutions. ACCA has consistently argued that the role of audit itself needs to be extended to take in issues such as risk management, internal controls and corporate governance. And yet the public sector is already there – in most developed countries ‘value for money’ audits are the norm. These are notably wider in scope than their private sector equivalents.

Under VFM audits, not only do the financial statements receive a true and fair opinion, but the auditors also have to comment on aspects of corporate governance and the effectiveness of the organisation’s arrangements to secure value for public money. There is also a wider variety of reporting in the public sector, driven by its multiple stakeholders (politicians, citizens, investors, pressure groups etc) which require reporting innovations such as scorecards. Audits have to satisfy all these requirements and audiences, which can be challenging.

Yet many of these audits are done by the same firms who seemingly find innovation much harder to bring into their private sector work. In the UK, the long-awaited report by the Competition Commission on audit competition has just been published and among its findings, the Commission concludes that there is considerable ‘unmet shareholder demand with regard to information supplied by auditors’ and that by putting the demands of management ahead of investors, auditors ‘competed on the wrong parameters’. Overall, the Commission’s report is a fairly bleak assessment of the current situation.

It is however, weaker on practical remedies to improve the situation. Amazingly it doesn’t mention liability once – yet concerns over liability have been shown, via outreach carried out by ACCA and others since 2009, to be a serious deadweight on innovation. This issue simply has to be addressed.

But firms – and the wider profession – also need to reflect on whether there is more they can do to bring some of the more interesting aspects of public sector audits to bear on their private sector work. This really might start to bridge that intractable expectations gap.

2012 brought CFOs in the US so much to get to grips with on financial standards and mandatory auditor rotation that precious little headspace was left for strategic direction of business.

2012 was a tough year for US corporate accountants. With heads down, eyes focused on managing risk, and more often than not buried in compliance and tax issues, there was little room for strategic growth for the finance C-suite. While most CFOs would claim their role is to be a true business partner and a critical forward-looking thinker on the C-level team, last year was full of distractions.

First, the US Financial Accounting Standards Board (FASB) issued up to 15 new exposure drafts (13 at the time of this writing) and seven freshly linked new standards. CFOs were also anxiously awaiting the final revisions to several big memorandum of understanding projects with the FASB and International Accounting Standards Board (IASB) – on financial instruments, impairment, hedge accounting, accounting for macro hedging, leases, and, last but not least, revenue recognition. Many finance folks were busy figuring out exactly what the proposals would mean for them.

Also on the standards agenda, the FASB and newly formed Private Company Council (PCC) proposed a new, simplified framework for modifying US GAAP for private companies. There was much debate on whether what many are calling a two-GAAP system would ultimately be good for corporate America as a whole. That argument continues.

Also in 2012, the coming of International Financial Reporting Standards (IFRS) was again a source of confusion for public company CFOs who would have liked some direction one way or another. An announcement regarding adoption (or not) was expected at the end of 2011, and again in 2012…but none was forthcoming. This has angered many US finance chiefs who would like a heads-up for their planning cycle and have already started going down the IFRS adoption path.

Against the backdrop of a fairly heavy accounting standards agenda came the threat of mandatory auditor rotation in the US, which many CFOs say would make their life much more complicated, not to mention expensive. The Public Company Accounting Oversight Board is now deliberating on what, if anything, it is going to do about changing the rules on mandatory auditor rotation in 2013. Currently, most votes are in the nay camp.

At the same time, COSO – the Committee of Sponsoring Organisations of the Treadway Commission – released a significant update to its original risk management framework, which many SOX 404 filers have adopted. The new model has been criticised for being prohibitively large for all but the bigger public companies with the resources to adopt it. COSO is revising the document; the hope is that the new framework will be ready for CFOs to start implementing in 2013.

So what does it all foreshadow for the role of the CFO this year and beyond? More of the same, says a recent ACCA/IMA study released in October 2012. CFOs, predicts the study, will continue to be challenged by the tug of war between their role as senior strategist and business partner and the ever-increasing demands of greater compliance,control and regulatory complexity.

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There’s something about the unique mindset of accountants that sets them apart from other professionals – and a slew of recent studies from the profession bear this out.

Are accountants a breed apart? Do you need to possess certain characteristics to have a successful career in accountancy? What really goes on in the head of an accountant?

The first two questions are academic; change the profession and you can ask the same about engineers, doctors, salespeople, lawyers, architects, teachers or, yes, even journalists. But there’s a simple way to address the third question, thanks to a number of studies and surveys that pick the brains of CFOs.

Trawl through the findings and you will discover nuggets of insight and uniqueness that suggest that the mindset of accountants indeed different in some aspects. Because CFOs generally understand economics and finance well, they are more sensitive to signs of trouble. It is no surprise, therefore, that the Bank of America Merrill Lynch 2012 CFO Outlook fall updatereports that never before has so much weighted on the minds of corporate finance chiefs.

In past installments of this survey of financial executives from large US companies, when respondents are asked to rate their economic and financial concerns, usually only two or three issues have stood out. This time, a majority of CFOs express concern about seven factors – a fact the report puts down to ‘the complexity and frailty of the US economy, as well as uncertainty about the upcoming US elections’ (interviews took place in July 2012).

When the BDO ambition survey 2012 asked more than 1000 CFOs of mid-sized companies planning foreign expansion to name countries that were considered risky to invest in, Greece landed in the top three; Iran heads the list, with 21% identifying it as the most risky for inward investment. The surprise is that the same proportion of respondents – 18% – mentioned Greece and Iraq. Syria and Libya come next, with 17% and 12% respectively.

Meanwhile, in a benchmark analysis of the finance effectiveness of more than 200 companies, PwC highlights some numbers that illustrate accountants’ high expectations. According to the firm’s report, Putting your business on the front foot, 80% of participants say the accuracy of their forecasts is critical to the running of the business, but only 45% believe the outputs are reliable. Over 90% of participants believe they have established governance frameworks to manage risk, but less than a quarter are truly confident that key controls are operating effectively. It is also worth noting that in the PwC-ACCA finance effectiveness survey 2012, which covers companies in Singapore, the majority of participants indicated that there was room for improvement in their risk management and control frameworks.

Is there a difference between government accountants and those in the private sector? To figure this out, a good place to start is Grant Thornton’s report, Charting a course through stormy seas: state financial executives in 2012. When respondents were asked to assess the level of trust and teamwork in their agency, almost half of executives and over a quarter of online respondents selected ‘neutral’. The report describes that as ‘that middle choice that avoided an opinion’. It adds: ‘It is unpleasantly surprising that so many executives could not or would not assess the level of trust and teamwork in their states’.

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By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation thinktank

The IASB and FASB differ over how best to switch from an incurred loss model for loans to an expected loss one. While the IASB has the ‘least bad’ option, it will be a case of seeing which works best.

Goodbye convergence, hello competition. Now that the US has backed away from adopting International Financial Reporting Standards (IFRS), the latest transatlantic duel is over how to switch from an incurred loss model for loans to an expected loss one.

As the chair of a committee responding to the plan from the International Accounting Standards Board (IASB), we felt a definite steer towards its ‘deterioration approach’. So it was hard to give the ‘lifetime loss approach’ proposed by its US peer, the Financial Accounting Standards Board (FASB) a fair hearing.

This is a pity because the FASB version appears simpler. Its ‘current expected credit loss model’ offers a single measurement objective of assessing expected losses (EL) over the life of the loan. So on day one there is no impediment to recognising any losses, whereas the IASB model entails booking ‘a portion’ effectively a 12-month horizon.

As the loan progresses, expectations are reassessed and adjustments made to the loan loss allowance. A bank that expands its lending by making more loans and/or extending its maturity will have bigger upfront losses.

Objections to this include that a day one loss is a nonsense. What management in its right mind – and let’s assume what chastened bankers are now closer to that – would lend at an immediate loss? Is it right that growing bank has to book bigger upfront losses?Is there a perverse incentive to keep loans to a short maturity?

The IASB suggest there is no reason to make a growing lender look less profitable than one in a steady state. The obvious counter is that the growing bank is more risky – and that should be reflected in the accounting.

It should be remembered that the IASB made itself vulnerable to US divergence by proposing a confusing ‘three-bucket’ approach to impairment. The deterioration model still has a trigger that switches loans from one bucket, where only a portion of EL are provided for, to another that allows the full lifetime losses. But the trigger sounds rather fussy – ‘a sufficient deterioration in credit quality’.

Forecasting full life-time losses at the outset of a loan is also fuzzy, so you have to pick which of the approaches offers better information about credit quality and is less easily gamed.

The principle should be that the accounting reflects economic reality, indeed that’s what the incurred loss model did. Banks are cyclical. They make a profit on a loan until it goes sour: the cliff edge is there. This can be anticipated with the help of experience – the EL idea – and postponed through forbearance, but it is not a smooth business.

Since the incurred loss model was used as an excuse for foot-dragging on loss recognition, the move to EL has broad support. But it should not provide an opportunity for a return to ‘general provisions’ that can later be fed back in to flatter profits.

The FASB promises that investors will receive plenty of information about changes in credit quality through the lenders’ regular reassessment of loss expectations. But this still means the analysis of profits will be done through the prism of movements in and out of the provision pool, at a remove from the actual performance of the loans.

There is a suspicion, denied by the FASB, that prudential regulators have applied pressure for more upfront provisioning. Accounting should remain neutral in this. It is bank boards, prompted by much tighter prudential requirements, that need to ensure enough profits are retained to absorb expected – and unexpected – losses.

So the IASB’s hybrid looks the least bad option. We are back in a world of competing standards, so let’s see which works best.

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As the Accountancy Futures Academy chair, I am often asked ‘So what does the future look like?’ As a practitioner myself, I think that the accountant that we know today will be different in ten years’ time – but how different?

For starters, the accountancy profession does not operate in isolation and its main challenges will certainly mirror those faced by the global economy. The areas that will impact the profession the most are: trust and reporting (strengthening public image by providing a more transparent, simplified but holistic picture of a firm’s health and prospects), regulatory expectations, standards and practices (a global approach), intelligent systems and big data (exploiting the repositories of big data), and finally, organisational remit (the increasing expectations that CFOs and the finance function should play a far greater role).

So how can a global accounting professional be better prepared to adapt and respond in a decade of uncertainty and rapid change?

As businesses adapt to a turbulent environment, accountants need to take on a far greater organisational remit, from strategy formulation through to defining new business models, the accounting professionals will need to embrace an enlarged strategic and commercial role. At the same time, accountants will need to focus on a holistic view of complexity, risk and performance and establish trust and ethical leadership. There is growing consensus on the need for reporting to provide a firm-wide view of organisational health, performance and prospects and must acknowledge the complexity of modern business and encompass financial and non-financial indicators of a firm’s status and potential.

Accountant’s global orientation, the ability to master the technical, language and cultural challenges of cross-border operations will be in the spotlight as the pace of global expansion of firms from developed and developing markets increases.

Lastly, the profession needs to reinvent the talent pool. The diverse range of demands on the profession is forcing a rethink of everything from recruitment through to training and development. Entrepreneurial spirit, curiosity, creativity and strategic thinking skills could be the key competences in the selection of tomorrow’s accountants.

There are significant uncertainties about how the driving forces will play out but the accountancy profession will need to be nimble enough to adjust and evolve and be able to maintain the balance between entrepreneurism and pursuing the highest standards of financial stewardship.

How certain is this? From my point of view, pretty spot on but only time will tell!